Trump tariff-induced export shocks and systemic risk : evidence from dual banking systems

Abstract

This thesis investigates the transmission of export shocks into the macroeconomic and financial system of four emerging market countries with dual banking systems: Indonesia, Malaysia, Pakistan, and Türkiye under the Trump Tariff 2.0 regime (2025). Work in the fields of trade economics and the stability of banking systems attends to single links in this chain but does not document the whole path. The study builds an integrated four-stage transmission model for 2015-2025 comprising GBM macroeconomic forecasting, panel fixed-effects estimation of export-to-macro and macro-to-bank elasticities, Bayesian Spatial Autoregressive (B-SAR) network spillover estimation, and the construction of the Spillover Vulnerability Index (SVI) as a forward-looking macroprudential monitoring instrument. The resilience of Islam banks is limited and not uniform across countries. Islamic banks are found to be less vulnerable than conventional banks in Indonesia and in Türkiye, while the most institutionally developed segment of the sample, namely the Islamic banks in Malaysia, are more vulnerable than their conventional banking peers, which is consistent with the likelihood of correlated fragility due to the product standardization and uniformity in Shariah banks. The tariff shock deepens the interdependence of networks in every country, and two regimes emerge: a contagion regime for Pakistani and Turkish conventional banks, where stressed banks shrink and the healthier ones grow, and a competitive differentiation regime for Malaysian Islamic banks, where stressed banks shrink and healthy banks expand and take over the dislodged demand, producing concentration risk instead of correlated contagion. The most extreme amplification observed in the sample is related to network spillovers, which explain 48.0 percent of the variance in banks' outcomes in Pakistan after the tariff is imposed. A structural decoupling emerges: Türkiye is the most vulnerable, while Pakistan experiences the most intense amplification. For the first time, the thesis describes the entire chain of transmission in dual banking emerging markets and introduces the concept of competitive differentiation as a new fragility mechanism, whilst also providing network-level evidence that institutional maturity in Islamic banking can lead to the emergence of systemic risk. The stress tests would be based on announced tariff rates only and fail to prioritise the different banking systems at risk at the right level.